Are we setting up for a 2011-type crash?

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

Since the second week of May — at a time when everyone was exceptionally bearish — I have been noting fractals in the Russell 2000 and Nasdaq 100 that had me looking up toward the region within which we now find ourselves. However, those same fractals portend a 2011-style crash that can take us into the summer. I have to say, in the Nasdaq 100’s case, it is extraordinarily similar to the 2011 fractal, and is still following its fractal almost exactly. If it does play out, we are likely within two weeks of it triggering a strong downside reversal.

The question now is what do we look for in the markets to determine if a 2011-style correction will be seen into the summer, or if the market will simply have the usual pullback/consolidations on its way to the 2000 region (on the S&P) this summer.

As I noted last weekend, after we came within .02 of our target last week in the Russell 2000 ETF
IWM, +0.05%
the IWM likely had a date with the 118.50 region this week. As of Friday, we hit a high of 118.30. So, while there is still room on the upside here, we are close enough that one may want to reduce their risk if they are long the IWM, and see how this region resolves itself. A break below 114 at this time would be a strong signal that the 2011 fractal is playing out, with a target between 95-100.

In the Nasdaq 100 E-mini futures
US:NQU4
I will be watching the same signal we saw in 2011. That will be if the moving-average convergence/divergence (MACD) breaks back down through the divergence line on the chart. To me, this would be an initial signal that the 2011 fractal was about to fulfill.

As far as the S&P 500 is concerned, there is a potentially much rosier picture one may chose to focus upon which still has the potential to play out. As I noted last weekend, when the market took out the 1931 level of resistance on the S&P E-mini futures
US:ESU4
it opened up the potential for a leading diagonal off the lows for wave (1) of the next 5 wave structure higher, as seen in the 60-minute chart linked below. On Fed day, we had our wave (2) pullback, which had me post a warning in our Trading Room that if the 1935.50 level were taken out to the upside, it would give us a strong indication that purple wave (3) may be in progress.

My target this past week for wave (3) was the 1958ES region, from which we came up short on Friday, but which may still be struck on Sunday night before the market pulls back in wave (4) early next week. As long as the market can maintain support next week over the 1943ES region, then I am looking for one more rally, likely seen at the end of the week, or potentially into the following week, which will complete the current 5 wave structure, ideally into the 1966-1972ES region.

From the more bullish perspective, as long as we maintain support over the 1943ES region, we may see extensions take us as high as the 1980ES region into the end of next week. If this pattern were to play out to that level, then we may be within a pattern that could nullify the 2011 fractal. Rather, it would have us expecting a pullback from the 1980ES region toward the 1913ES-1931ES region into July, which would set up another rally toward a minimum of the 1992ES region, with the potential to take us toward 2011-2042ES region. It will only be from this region just over the 2000 level that we will finally see the 10%-15% correction for which everyone has been awaiting so impatiently.

But, again, the 2011 fractals must be respected, especially if support should fail in the S&P500 sooner rather than later. The main support one must watch at all times is the 1906-1913ES region. If that support region should fail at any point in time within the next three weeks, that would be a strong signal that the market was heading down towards the 1800 region, and potentially the better target between 1750-1770, at a very rapid speed. So, if you see support fail, be prepared to act quickly, as the fractal presents as a crash-like descent.

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